An economist reviews the Surge

Steven Levitt of Freakonomics fame discusses this economic analysis of the Surge in Iraq by Michael Greenstone, an economist at MIT, calling it "thorough and thoughtful." Overall the analysis is neither uniformly negative nor positive, instead apolitical and dispassionate. One particularly interesting part is a discussion of the financial bond markets, which Levitt summarizes:

The most interesting part of Greenstone’s paper is his analysis of the pricing of Iraqi government debt. The Iraq government has issued bonds in the past. These entitle the owner of the bond to a stream of payments over a set period of time, but only if the government does not default on the loan. If Iraq completely implodes, it is highly unlikely that these bonds will be paid off. How much someone would pay for the rights to that stream of payments depends on their estimate of the probability that Iraq will implode.

The bond data, unlike the other sources he examines, tell a clear story: the financial markets say the surge is not working. Since the surge started, the market’s estimate of the likelihood of default by the Iraqi government has increased by 40 percent.


This is akin to the way that political analysts use the Iowa Political Futures Market and Intrade for political prognostications. I think Milton Friedman would be proud :)

The more important part of the analysis however is the use of economics for rational policy analysis. As Levitt notes,

This paper shows how good economic analysis can contribute in a fundamental way to public policy. Anyone who reads Greenstone’s article will recognize that it is careful and thorough. It is even-handed and apolitical. It combines state-of-the-art data analysis techniques with economic logic (e.g., using market prices to draw conclusions about how things are going).


However, Levitt notes that there isn't much incentive for good economists to trouble themselves with getting their feet dirty in the political sphere. As a result, most economic analysis of politics tends to be done by less skilled economists or economists on the payroll of special interests, which biases the public debate. The blogsphere, of course, is changing this dynamic, as Levitt's own blog demonstrates.

Comments

Thomas Nephew said…
Interesting story and analysis. I take issue with Levitt and Greenstone on Baghdad civilian casualties and the surge, though -- not on the numbers or on the change observed, but on whether the effect is really due to the surge.

See this post illustrating a counterhypothesis: ethnic cleansing inside Baghdad has progressed to the point where Baghdad has "settled out" into very large Sunni and Shia enclaves.

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